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What would be the expected rate of return on common stock

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Question - You have the following data on The Home Depot, Inc. Market value of long-term debt: $20,888 million

Market value of common stock: $171,138 million

Beta: 1.04

Yield to maturity on debt with 10 years to maturity: 2.167%

Expected return on common stock: 8.108%

Marginal tax rate: 35%

Assume that if Home Depot issues new bonds, the bonds will have 10 years to maturity.

Suppose that managers at Home Depot decide to increase the proportion of debt to 20% of the value of the company. The managers estimate that yield on the company's 10 year bonds will rise to 2.361% if the company changes its capital structure in this manner.

What would be the expected rate of return on common stock under the new capital structure?

Reference no: EM133075734

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